U.K.’s Housing-Bubble Hysteria Is Misguided, EY Item Club Says

The U.K. is in “hysteria” about housing and concern that a bubble is brewing in the property market is overdone, according to the EY Item Club.

Prime Minister David Cameron’s Help to Buy measure to aid homebuyers with smaller savings will lead to a “stronger” housing market, the London-based group said in a report today. It forecast a 7.5 percent increase in housing investment next year and 10 percent in 2015.

The government brought forward the second phase of Help to Buy to this month, heightening concerns that supply won’t be able to keep pace with demand, boosting house prices. Acadametrics said on Oct. 11 that home values rose to a record last month as easier access to credit drove first-time buyers back to the market.

“Despite the recent criticism of these initiatives, the chances of seeing another housing-market bubble are extremely slim,” said Peter Spencer, chief economic adviser to the EY Item Club. “House prices and transactions are only just recovering from the credit crunch and will be paltry in comparison to those of a decade ago.”

The group made the comments in its quarterly report, in which it also raised its forecasts for U.K. economic growth. Gross domestic product will increase 1.4 percent this year and 2.4 percent in 2014, compared to previous projections of 1.1 percent and 2.2 percent, it said.

Short-term growth is dependent on consumers cutting savings, EY said. While disposable incomes will increase 0.2 percent this year, consumer spending will grow 1.6 percent.

This “needs to be supplemented by a thrust from the engines of export and investment,” Spencer said. “Otherwise, there’s a real risk the recovery will falter.”

Business investment will increase 6.9 percent next year after falling 5.6 percent this year, the group said.

“After the slowest recovery from a recession in generations, it’s perhaps unsurprising that business investment to date has been cautious,” said Mark Gregory, Ernst & Young’s chief economist. “But with the recovery now gathering pace, staying in wait-and-see mode is no longer a viable option.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE